Economy | 22.06.2010

New British government plans to wipe out record deficit in five years

Großansicht des Bildes mit der Bildunterschrift: Osborne unveils the budget to parliament

The British government has unveiled plans to balance the books within five years. Sales tax will go up to 20 percent while spending will be cut by 25 percent by 2016.

British Finance Minister George Osborne has introduced a painful budget in order to almost wipe out the UK's record budget deficit of 149 billion pounds to almost nothing within five years. Less than one month after the Conservative-Liberal Democrat coalition government took office, Osborne delivered the emergency austerity budget in the House of Commons, Westminster, central London.

He insisted this budget - the toughest this generation - was intended to undo the previous Labour government's irresponsibility, saying its spending levels were unsustainable.

UK borrowings this year amount to a record 149 billion pounds (180 billion euros or $220 billion). That's 10.1 percent of GDP. Osborne said this was not sustainable and he wants to cut this to 20 billion pounds, or just 1.1 percent of GDP by 2016.

Three-quarters of the belt-tightening will come from spending cuts, the rest from tax increases.

VAT, bank tax to raise billions

One of the biggest money-making measures will be an increase in VAT sales tax from 17.5 per cent to 20 per cent. This will raise 13 billion pounds, or nearly 16 billion euros, annually.

Osborne will also slap on a levy on bank profits from next year, with the support of France and Germany. The levy, once it's in place, will raise around two billion pounds annually, depending on its structure and scale.

Osborne said the coalition government would freeze pay for all but the lowest earning public servants for two years. Welfare spending and benefits will be cut by eleven billion pounds or just over 13 billion euros. He also said there would be no increase in funds paid to Britain's Royal Family for its day-to-day costs. Spending by the Royal Family is in future to be monitored by the National Audit Office.

"When we say that, we are all in this together," Osborne told parliament.

Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift: A levy for banks is combined with tax breaks for low income earnersIncome tax breaks for low earners

"It seems to be a tighter budget than people generally were anticipating,” said Jonathan Loynes, chief UK economist at Capital Economics. “By the look of the borrowing numbers, there's a bigger squeeze here than most people were expecting.”

Nearly a million of Britain's lowest income earners however will no longer have to pay income tax. The income tax threshold will be raised by 1,000 pounds to 7,475 pounds.

Corporate tax will drop by one percent to 27 percent next year and then keep falling to 24 percent by 2014.

"Our current rate ... is looking less and less competitive so we will do something about it," Osborne said.

Britain's top business lobby, the CBI, welcomed the package.

"Mr Osborne is close to achieving his 80:20 ratio of spending cuts to tax increases, which is so important to sustaining long-term growth,” said CBI director-general Richard Lambert.

“He has struck a sensible balance on capital gains tax, limiting the impact of the increase on entrepreneurial activity and long-term savers. The five-year route map for corporation tax provides much-needed consistency and certainty.”

Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift: Rating agencies warn failure to deliver the budget could affect Britain's credit rating"It's a Tory budget," says Labour

Liberal Democrat leader, Nick Clegg, sat next to Osborne as he delivered his budget nodding in agreement to measures he opposed during his election campaign. Compromises had to be made by both sides of the coalition.

The leader of the opposition Labour Party, Harriet Harman, pronounced the budget to be unashamedly Conservative.

"It’s his first budget and we have seen it all before, this is a Tory budget that will throw people out of work and hold back economic growth and will harm vital public services."

Economists tend to agree that the measures could endanger Britain's recovery from its worst recession since World War II.

Rating agencies however warn Britain's triple-A status could be at risk if Osborne fails in his attempt to cut the record deficit.

"Fear about sustainability of sovereign debt is the greatest risk to the recovery of European economies," said Osborne, justifiying his budget.

He now faces the daunting task of delivering the package while keeping the coalition government together. He will also have to try to keep the British public on board as the painful measures begin to bite. In October, a spending review will show which government departments will be hardest hit and where the axe will fall.

Authors: Olly Barratt/Wilhelmina Lyffyt (Reuters/AFP)
Editor: Michael Lawton